Is income redistribution in the U.S. excessive?

In contemporary times-and especially in this election year-there has been a lot of debate on whether the U.S. tax system leads to excessive redistribution.

Those on the right love to point to findings that show the top 1 percent of taxpayers generate approximately 40 percent of all income tax revenues. These findings are then used to advance the argument that in our country, the government increasingly redistributes too much to too many from too few. In contrast, those on the left contend that the U.S. tax system actually favors the wealthy and that the notion of excessive redistribution is a chimera.

To know whether there is excessive redistribution in this country, it helps to first grasp how the U.S. government uses the tax system to raise revenue. Unlike other wealthy nations that use consumption taxes to raise significant amounts of revenue, the U.S. government uses income taxes.

Now, consumption taxes are generally regressive, whereas income taxes tend to be progressive. As noted by Clive Crook in the Atlantic and by others, this progressiveness of the U.S. tax system is efficiency-inducing and thus desirable. However, the extent of this efficiency is diminished by the many deductions and loopholes in the system, which tend to disproportionately benefit the wealthy.

When it comes to expenditures, the U.S. government spends relatively little on direct cash transfers and relatively large amounts providing health care for the poor (Medicaid) and for the old (Medicare). This state of affairs prompted the Economist to opine recently that the U.S. government "raises revenues inefficiently and redistributes them oddly: too much from young to old, too much in the form of health care, and ever less from rich to poor."

Despite what people on the right frequently tell us about massive redistribution from the wealthy to the penurious, the fact is that the U.S. spends less than half as much as the mean OECD nation on direct cash transfers for working-age people. In addition, the Center on Budget and Policy Priorities has noted that more than 50 percent of all entitlement spending goes to the elderly and about 40 percent of this is spent on health care.

Many of the issues relating to redistribution are well-discussed in "Wealth and Welfare States: Is America a Laggard or Leader?" a recent book by Irwin Garfinkel, Lee Rainwater and Timothy Smeeding. These authors make two valuable points. First, they note that by means of the popular mortgage interest deduction, the federal government spends four times more subsidizing housing for the wealthiest 20 percent of all Americans than it spends on public housing for the bottom quintile of the population. Second, they point out that relative to the old, the nation's young are disadvantaged because the government spends a lot more on health care for the old and far less on preschool education.

In sum, the existing evidence demonstrates that although the loophole- and deduction-laden U.S. tax system results in some redistribution, this redistribution can hardly be termed excessive.

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology; these views are his own.11/16/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.